In physics, gravitation dictates that what goes up must come down. The stock market, however, is a bit less predictable. Stocks can follow the crowd, buck the market’s trend, or just mosey along.
This year, energy stocks are bringing up the bottom of the pack, underperforming the broader markets. However, it’s worth noting that what goes down can still come back up. In this regard, investment giant Goldman Sachs has been identifying energy stocks that are primed for a turnaround.
In a note authored by 5-star analyst Neil Mehta, the Goldman view is laid out clearly, presenting several reasons why energy stocks are weak this year, including: “1) higher than expected Russia oil supply, 2) concerns about industrial demand… [and] 3) lower natural gas prices…”
Mehta goes on to explain in more depth why a rebound is in the offing, saying, “While we recognize the environment is more challenging for Energy equities than the 2021/2022 recovery, we do believe there are attractive opportunities given valuation, capital returns and thematic tailwinds for many of the companies in our coverage…. For these stocks, we believe the risk-reward will improve as positive catalysts begin to materialize.”
Now, let’s take a closer look at some of the energy companies that Mehta and his colleague Umang Choudhary believe will realize gains on improved risk/reward. Here are details on two of them, along with the analysts’ comments.
Halliburton Company (HAL)
The first Goldman energy pick we’ll look at is Halliburton, one of the world’s largest oilfield services companies. Oilfield services play a vital role in the energy production chain, encompassing various technical and engineering functions. These companies provide the expertise needed to operate oil and gas wells, conduct horizontal drilling and fracking operations, maintain fluid pumps and pipelines, and safely decommission and plug non-productive wells — and that’s just a glimpse of their extensive responsibilities. Without companies like Halliburton, the oil and gas giants would face significant challenges in extracting the product from the ground.
Halliburton has certainly capitalized on these opportunities, experiencing significant business growth. With a market cap exceeding $27 billion and revenue surpassing $20 billion last year, the company has consistently achieved year-over-year gains in quarterly revenue for several years. Impressively, the last four quarters have all demonstrated top-line figures of $5 billion or higher.
In the most recent quarter, 1Q23, Halliburton recorded total revenues of $5.7 billion, surpassing estimates by $210 million and achieving a 33% growth compared to the year-ago period. The company’s earnings stood at $0.72 per share, exceeding expectations by 5 cents and more than doubling the figure from 1Q22. Notably, Halliburton’s strong revenue performance was supported by both of its major divisions: Completion and Production witnessed a 45% year-over-year increase, reaching $3.4 billion, while Drilling and Evaluation saw a 17% year-over-year gain, totaling $2.3 billion.
In addition to its sound financial performance, Halliburton kept up its commitment to shareholder capital return. The company bought back $100 million worth of shares in Q1, and its most recent dividend, declared earlier this month for a June 28 payout, was set at 16 cents per share. The company has been raising its dividend post-COVID, after slashing it during the height of the pandemic crisis.
Even though HAL shares can rest on a solid foundation, they are down 21% so far this year. Goldman’s Neil Mehta, however, sees that as an opportunity for investors to buy in on a quality stock at a discount.
“At current valuation levels we view several factors as underappreciated. First, ~50%+ of revenues in 2024 will likely come from international operations. Second, we do not expect natural gas will be at $2.00-$2.50/MMBtu Henry Hub into perpetuity, with our mid-cycle closer to $3.50/MMBtu. Third, the valuation is compelling, with HAL now trading at a ~2.5x discount to large cap services on 2023 and 2024 estimates vs the historical range of 1.5x-2.0x,” Mehta opined.
Quantifying his stance, Mehta gives HAL a Buy rating with a $45 price target, indicating his confidence in a 46% upside potential on the one-year horizon. (To watch Mehta’s track record, click here)
Overall, this stock gets a unanimous Strong Buy from the analyst consensus, based on 9 positive reviews posted in recent weeks. The shares are selling for $30.82 and the $46.67 average price target suggests a 51% increase from that level. (See HAL stock forecast)
Antero Resources (AR)
Next up is Antero Resources, a natural gas producer operating in the Marcellus and Utica shale formations along the upper Ohio River. These formations are located in the rich Appalachian gas fields, specifically in the states of West Virginia and Ohio. Antero holds extensive holdings in both formations, with a total of 512,000 net acres. Moreover, the company boasts over 1,200 producing horizontal wells.
Antero’s wells are tapping into the world’s second-largest proven natural gas field, with more than 410 trillion cubic feet of gas within reach. The company is a major supplier of gas for the liquified natural gas market, both in the US and abroad. In addition, Antero works with a midstream affiliate that provides pipelines, compression, and processing assets, making it a fully integrated natural gas producer and supplier.
Having such a strong base allowed Antero to post solid production growth numbers in the recent first quarter. In the first three months of this year, Antero averaged a net production of 3.3 billion cubic feet equivalent per day, representing a year-over-year gain of 3%. This growth was fueled by a 17% increase in natural gas liquids production, which rose to reach 187 thousand barrels per day (MBbl/d). However, natural gas production in Q1, at 2.2 billion cubic feet per day (Bcf/d), declined by 3% compared to the previous year.
On the financial end, Antero brought in $1.4 billion at the top line in 1Q23, for a 79% increase from the prior-year period. At the bottom line, the company’s 69 cent EPS was a powerful turnaround from the 50-cent EPS loss reported in 1Q22. Both the revenue and EPS beat expectations in Q1, the top line by $201.8 million and the bottom line by 29 cents per share. On product pricing, Antero holds a strong position. During Q1, the company realized a 71-cent premium per Mcfe, when compared to NYMEX gas pricing.
Even though Antero has done well on production and earnings this year, the company’s free cash flow in Q1 fell 44% year-over-year, although it remained substantial, at $174 million.
Antero’s stock is also down sharply, with shares plummeting by 25% year-to-date. This stands in sharp contrast to the 7% gain recorded on the S&P 500.
The fall in share price has not prevented Goldman Sachs analyst Umang Choudhary from coming down firmly on the bullish side for this stock. He sees Antero well positioned to move forward, and lays out three reasons why: “(1) our positive view on NGLs prices longer-term; (2) higher cash returns to shareholders given its strong balance sheet; and (3) attractive Appalachia assets and its ability to achieve premium pricing for 75% of its gas sold in the Gulf Coast.”
“Despite challenges to near-term FCF generation due to a combination of weaker gas/NGL prices, we believe the company is well positioned to benefit in 2024/25 with higher NGLs/gas prices which should drive a material re-rate in FCF yields — we expect a 13% FCF yield on average in 2024-26 vs. peers at 12%. AR plans to deploy bulk of the FCF towards a capital returns program. We believe confidence in higher gas/NGLs prices along with capital returns execution can drive upside to shares,” the analyst explained.
Choudhary goes on to give this stock a Buy rating, and a price target of $29 per share, suggesting ~25% upside for the year ahead.
The rest of Wall Street’s analyst corps are split down the middle on this one. With an additional 6 Buys and Holds, each, the stock has a Moderate Buy consensus rating. However, the outlook is more conclusive where the share price is concerned; going by the $30.91 average target, the stock is expected to add 32% of value over the coming year. (See AR stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.